How to Fund Indian Start-Ups

Even though interest in entrepreneurship is at its highest in India, the country has a nominal seed capital infrastructure. India has numerous small retailers and service providers who are shining examples of scrappy entrepreneurship at its best, but the information technology startups that are my primary interest typically require outside funding.

With that in mind, how do we find new ways to fund India’s tech startups and build global businesses?

India has done well in the last twenty odd years to build its technology industry through services. Today we’re seeing a maturing of the industry, and entrepreneurs now want to build products as well. Or they want to build online businesses: e-commerce, mobile apps, so forth. Sometimes they want to build hybrid businesses–both online and physical. Or they want to combine products and services.

As far as I am concerned, all those permutations and combinations are fine. However, in today’s India, building capital-intensive businesses is difficult. Even more difficult is to build a business that requires capital out of the gate.

If you can bootstrap your way to validation and revenue, ideally, to profitability, then there is plenty of capital available. However, if you need capital to validate, you are operating in a zone that will be full of very dark hours.

All risk capital in India is in effect growth capital. You will need to absorb the risks yourself, and present a growth opportunity to angels and VCs. If you can bootstrap your way to, say, $1 million in revenue, there is enough capital out there to give you $5 million or $10 million to get to the next level.

But if you need funding in the seed stages, before validation, there is very little capital in the system.

My friend Sharad Sharma, an active angel investor, sums up the situation well:

“The US does more seed deals by 11am in a single day than India does in a year. I haven’t dug up the 2012 numbers. But in 2011, $30 billion was invested by angels and $24 billion by Series A venture capitalists. If one assumes each angel deal was $300,000 per deal, then about 100,000 deals were done in 2011. That is about 500 deals per working day. In India, Indian Angel Networks did 13 deals last year, Mumbai Angels about a similar number, Harvard Angels did three, Chennai Angels did six, etc. The optimistic number for the number of angel deals would be 100. Even the most optimistic observer who’d count every informal deal would not put it past 200. So the Indian seed stage ecosystem is really small. This is not what the media makes it out to be.”

More recently, there is an over active incubator network that has taken hold. The Indian government is offering money for people to set up incubators, which has led to a lot of clueless people setting up incubators. They promise seed funding to naïve entrepreneurs who, more often than not, are entirely unfundable. They lack the experience or skills to mentor entrepreneurs and teach them what needs to be taught. Several VCs, who for obvious reasons do not want to be quoted, have complained to me that “incubators” and “advisors” in India are dishing out bad advice to unsuspecting entrepreneurs. Some even run scams like asking for 5-10% equity to “introduce” founders to angel investors. And most claim to “graduate” entrepreneurs from their programs in 3-6 months with nothing to show.

Given this rather messy environment, entrepreneurs have a few pragmatic choices on how to navigate the seed stage bottleneck:

Bootstrap with Services: Many Indian IT entrepreneurs come from the services industry background. Using IT services to generate cash and develop customer intimacy, it is entirely possible to build products. We have numerous case studies of this being a tried and true procedure, and recommend it strongly.

Bootstrap with a Paycheck: Many aspiring Indian entrepreneurs are currently sitting on the sidelines, not yet ready to play. I suggest you hold on to your paycheck, and start validating your idea. Learn what it takes to build a business. There are concrete, defined ways in which you can do so. Especially if you are building online businesses, this is an excellent strategy. Quit your job only AFTER your fledgling business achieves a certain level of validation.

Friends and Family: Historically, in India and elsewhere, entrepreneurs have built businesses with the backing of their friends and family. The biggest difference between professional investors and friends and family is that the latter cares about YOU.

The Indian market is a slow adopter of new technologies. As such, you cannot expect to be able to get to a product-market fit in three months. It may be 18-36 months before your venture really starts to find its stride.

Until then, you are better off sticking to one of the three above principles of bridging your capital gap.

In summary, there is a miniscule pool of seed money in action in India currently. Most of this money will go to validated businesses, not to concepts, and not to entrepreneurs experimenting with concepts.

Stop wasting time chasing capital unless you have reached sufficient maturity.

In India, by and large, the definition of seed capital is misunderstood by naïve entrepreneurs. They think entrepreneurship is sexy, and investors are sitting around, waiting to write checks for them to start their businesses.

This expectation needs to change.

As angel investor Nandini Mansinghka puts it, “Seed capital needs to return to its old-fashioned definition of people who know you putting in money in your venture, because they believe in you rather than your core idea. The only difference as we mature as an ecosystem, is these known people will not just be family, but the extended network built both personally and digitally.”

And if you don’t have such friends and family to help you get off the ground, then focus on the other two options: bootstrap with services, or bootstrap with a paycheck.

In India as it exists today, those are your options.

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